Advance Accounting 2004 Suggested

PAPER – 1 : ADVANCED ACCOUNTING Answer all questions.

Working notes should form part of the answer. Wherever necessary, suitable assumptions may be made by the candidate.

Question 1

The following are the summarised Balance Sheets of PD Co. Ltd. and SD Co. Ltd. as on 31.3.2004.

Liabilities PD Co. Ltd. SD Co. Ltd. Rs. Rs. Share Capital: Authorised 70,00,000 30,00,000 Issued and Subscribed Capital Equity shares of Rs. 10 each fully paid 50,00,000 20,00,000 Capital Reserve 5,00,000 3,10,000 Revenue Reserve 8,50,000 75,000 Profit and Loss Account 4,00,000 2,80,000 Sundry Creditors 2,50,000 2,25,000 Bills Payable 1,00,000 10,000 71,00,000 29,00,000

Assets PD Co. Ltd. SD Co. Ltd. Rs. Rs. Land and Buildings 20,00,000 15,20,000 Plant and Machinery 20,00,000 8,00,000 Furniture 5,00,000 1,60,000 Investments 16,10,000 − Stock 3,40,000 1,00,000 Sundry Debtors 3,60,000 2,00,000 Bills Receivable 50,000 40,000 Bank 2,40,000 80,000 71,00,000 29,00,000

FINAL EXAMINATION : NOVEMBER, 2004 4

PD Ltd. acquired 80% shares of SD Ltd. on 30.09.2003 at a cost of Rs. 18,10,000. On 1.10.2003 SD Ltd. declared and paid dividend on Equity Shares. PD Ltd. appropriately adjusted its share of dividend in Investment Account.

On 1.4.2003, the Capital Reserve and Profit and Loss Account stood in the books of SD Ltd. at Rs. 50,000 and Rs. 2,75,000 respectively.

Land and Buildings standing in the books of SD Ltd. at Rs. 16,00,000 on 1.4.2003, revalued at Rs.20,00,000 on 1.10.1993. Furniture, which stood in the books at Rs. 2,00,000 on 1.4.2003 revalued at Rs.1,50,000 on 1.10.2003. In both the cases the effects have not yet been given in the books.

SD Ltd. bought an item of machinery from PD Ltd. on hire-purchase basis. The following are the balances in respect of this machinery in the books on 31.03.2004:

Rs. Instalment due 20,000 Instalment not due 8,000 Hire-purchase stock reserve 1,600

The above items stood included under appropriate heads in Balance Sheet.

Prepare a Consolidated Balance Sheet of PD Ltd. and its subsidiary SD Ltd. as at 31.03.2004, complying with the requirements of AS-21. (16 marks)

Answer

Consolidated Balance Sheet of PD Co. Ltd. with its subsidiary SD Co. Ltd. as on 31st March, 2004

Liabilities Rs. Rs. Assets Rs. Rs. Share Capital: Fixed Assets: Authorised 70,00,000 Land and buildings Issued and subscribed PD Ltd. 20,00,000 Equity shares of Rs. 10 each, fully paid up

50,00,000

SD Ltd. (W.N. 2) Plant and machinery

19,50,000 39,50,000

Minority interest (W.N. 5) 6,14,000 PD Ltd. 20,00,000 Reserves and surplus: Capital reserve (W.N. 8)

12,18,000

SD Ltd. 8,00,000 28,00,000

Revenue reserve (W.N. 9) 8,80,000 Less: Unrealised profit Profit and loss account 4,92,400 on hire purchase (W.N. 10) Current liabilities and provisions:

transaction Furniture PD Ltd.

5,600

5,00,000

27,94,400

Current liabilities SD Ltd. (W.N. 2) 1,35,000 6,35,000

PAPER – 1 : ADVANCED ACCOUNTING 5

Sundry creditors PD Ltd.

2,50,000

Current assets, loans and advances:

SD Ltd. 2,25,000 Current assets 4,75,000 Stock Less: Mutual hire purchase indebtedness Bills payable

28,000

4,47,000

PD Ltd. SD Ltd.

3,40,000 1,00,000 4,40,000

PD Ltd. SD Ltd.

1,00,000 10,000

1,10,000

Less: Hire purchase instalment not due

8,000

4,32,000

Sundry debtors PD Ltd. 3,60,000 SD Ltd. 2,00,000 5,60,000 Less: Hire purchase

Instalment due 20,000 5,40,000

Loans and advances: Bills receivable PD Ltd. 50,000 SD Ltd. 40,000 90,000 Cash and Bank Balances: Bank PD Ltd. 2,40,000 ________ SD Ltd. 80,000 3,20,000 87,61,400 87,61,400

Working Notes:

1. Analysis of reserves and profits of SD Co. Ltd. as on 31.03.2004.

Pre-acquisition profit upto

30.09.2003

Post-acquisition profits (1.10.2003 – 31.3.2004)

(Capital profits) Capital reserve

Revenue reserve

Profit and loss account

Capital reserve as on 31.3.2004 3,10,000 Less: Balance as on 1.4.2003 50,000 50,000 Created during the year 2,60,000 1,30,000 1,30,000 Revenue reserve as on 31.3.2004 75,000


Less: balance as on 1.4.2003 − Created during the year 75,000 37,500 37,500 Profit and loss account as on 31.3.2004

2,80,000

Add: Dividend paid on 1.10.2003 2,50,000 (out of pre-acquisition profits) 5,30,000 Less: balance as on 1.4.2003 2,75,000 Earned during the year 2,55,000 1,27,500 1,27,500 Profit as on 1.4.2003 2,75,000 Less: Dividend paid [(Rs.18,10,000 – Rs.16,10,000) × 5/4] 2,50,000 Balance of pre-acquisition profit ______ as on 31.3.2004 25,000 25,000 Revaluation reserves as on 1.10.2003: Profit on land and buildings (W.N. 2) 4,40,000 Loss on furniture (W.N. 2) (30,000) Difference in depreciation (for 6 months) due to revaluation:

Short depreciation on land and building (W.N. 3)

(10,000)

Excess depreciation on furniture (W.N. 3)

_______

_______

______

5,000

Total 7,80,000 1,30,000 37,500 1,22,500 Minority Interest (20%) 1,56,000 26,000 7,500 24,500 Share of PD Co. Ltd. (80%) 6,24,000 1,04,000 30,000 98,000

2. Profit or loss on revaluation of assets in the books of SD Ltd. and their book values

as on 31.3.2004

Rs. Land and buildings Book value as on 1.4.2003 16,00,000 Depreciation at 5% p.a. [(80,000 × 100)/16,00,000] for 6 months 40,000 15,60,000


Revalued on 1.10.2003 20,00,000 Profit on revaluation 4,40,000 Value as per balance sheet on 31.3.2004 15,20,000 Add: Profit on revaluation 4,40,000 19,60,000 Less: Short Depreciation (W.N. 3) 10,000 Value as on 31.3.2004 19,50,000 Furniture: Book value as on 1.4.2003 2,00,000 Less: Depreciation @ 20% p.a. [(40,000 × 100)/2,00,000] for 6 months 20,000 1,80,000 Revalued on 1.10.2003 1,50,000 Loss on revaluation 30,000

Value as per balance sheet on 31.3.2004 1,60,000 Less: Loss on revaluation 30,000 1,30,000 Add: Excess depreciation written back (W.N. 3) 5,000 Value as on 31.3.2004 1,35,000

3. Calculation of short/excess depreciation

Building Furniture Revalued figure as on 1.10.2003 20,00,000 1,50,000

Rate of depreciation 5% p.a. 20% p.a.

Depreciation for 6 months on revalued figure (1.10.2003 to 31.3.2004)

50,000 15,000

Depreciation already provided 40,000 20,000 Difference [(short)/excess] (10,000) 5,000

4. Calculation of cost of control

Rs. Share capital in SD Ltd. 16,00,000 Add: Capital profit 6,24,000 22,24,000 Less: Cost of Investments 16,10,000 Capital Reserve 6,14,000


5. Calculation of minority interest

Rs. Rs. Share capital 4,00,000 Capital (pre-acquisition) profits 1,56,000

Revenue (post-acquisition) profits:

Capital Reserve 26,000 Revenue reserve 7,500

Profit and loss 24,500 58,000

6,14,000 6. Stock reserve (plant and machinery)

Percentage of profit on hire purchase transaction

20% 8,000

100 1,600 =×

20% on Rs. 20,000 = Rs. 4,000

Total unrealised profit = Rs. 4,000 + Rs. 1,600 = Rs. 5,600 7. Elimination of mutual indebtedness

Elimination of mutual indebtedness in respect of sale of machinery on hire purchase basis will be made as under in the Consolidated Balance Sheet.

Creditors Debtors Stock Plant and machinery

Rs. Rs. Rs. Rs. Total (PD Ltd. and SD Ltd.) 4,75,000 5,60,000 4,40,000 28,00,000

Less: Instalment due 20,000 20,000 − −

Less: Instalment not due 8,000 − 8,000 −

Less: Profit on plant purchased by SD Ltd. from PD Ltd. on hire purchase

−

−

−

5,600

4, 47,000 5,40,000 4,32,000 27,94,400

For consolidated balance sheet purpose, the unrealised profits will be eliminated by

deducting Rs. 5,600 from Plant & Machinery and from profit and loss account.


8. Consolidated capital reserve as on 31.3.2004

Rs. Capital reserve of PD Ltd. as on 31.3.2004 5,00,000 Add: Share in post acquisition capital reserve of SD Ltd. (W.N. 1) 1,04,000

Add: Cost of control (W.N. 4) 6,14,000

12,18,000 9. Consolidated revenue reserve as on 31.3.2004

Rs. Revenue reserve of PD Ltd. as on 31.3.2004 8,50,000

Add: Share in post acquisition revenue reserve of SD Ltd. (W.N. 1) 30,000 8,80,000

10. Consolidated profit and loss account as on 31.3.2004

Rs. Profit and loss account balance of PD Ltd. as on 31.3.2004 4,00,000 Add: Share in post acquisition profit and loss account of SD Ltd. (W.N. 1) 98,000

Less: Unrealised profit on hire purchase (5,600)

4,92,400 Note: In the question, the balance of capital reserve and profit and loss account of SD Ltd., as on 1.4.2003 only has been given and not of revenue reserve. Hence, it has been assumed in the above solution that the revenue reserve is created during the year from current year’s profits.

Question 2

The following is the Profit and Loss Account of Galaxy Ltd. for the year ended 31.03.2004. Prepare a Gross Value Added Statement of Galaxy Ltd. and show also the reconciliation between Gross Value Added and Profit before taxation.

Profit and Loss Account for the year ended 31.03.2004 Notes Amount (Rs. in lakhs) Income: Sales − 890

Other Income − 55

945 Expenditure: Production and operational expenses (a) 641 −


Administration expenses (Factory) (b) 33 − Interest (c) 29 − Depreciation 17 720 Profit before taxes − 225

Provision for taxes (d) − 30

Profit after tax − 195

Balance as per last Balance Sheet − 10

205 Transferred to General Reserve 45 − Dividend paid 95 − 140 − Surplus carried to Balance Sheet 65 − 205 −

Notes: (a) Production and Operational expenses Rs. in lakhs Consumption of raw materials 293 Consumption of stores 59 Salaries, Wages, Gratuities etc. (Admn.) 82 Cess and Local taxes 98 Other manufacturing expenses 109 641 (b) Administration expenses include salaries, commission to Directors Rs.9.00 lakhs

Provision for doubtful debts Rs. 6.30 lakhs.

Rs. in lakhs (c) Interest on loan from ICICI Bank for working capital 9 Interest on loan from ICICI Bank for fixed loan 10 Interest on loan from IFCI for fixed loan 8 Interest on Debentures 2 29 (d) The charges for taxation include a transfer of Rs. 3.00 lakhs to the credit of Deferred

Tax Account.

(e) Cess and Local taxes include Excise Duty, which is equal to 10% of cost of bought-in material. (16 marks)


Answer

Galaxy Ltd. Gross Value Added Statement for the year ended 31st March, 2004

Rs. in lakhs Rs. in lakhs

Sales 890 Less: Cost of bought in materials and services: Production and operational expenses (293 + 59 + 109) 461

Administration expenses (33 – 9) 24

Interest on working capital loan 9 Excise duty (Refer working note) 55 549

Value added by manufacturing and trading activities 341

Add: Other income 55 Total value added 396

Application of Value Added %

To Employees

Salaries, wages, gratuities etc.

82

20.71% To Directors

Salaries and commission

9

2.27%

To Government Cess and local taxes (98 – 55)

43

Income tax 27 70 17.68%

To Providers of capital Interest on debentures

2

Interest on fixed loan 18

Dividends 95 115 29.04% To Provide for maintenance and expansion of the company

Depreciation

17

General reserve 45 Deferred tax 3

Retained profits (65 – 10) 55 120 30.30%

396 100%


Statement showing reconciliation of Gross Value Added with Profits before taxation Rs. in lakhs Profits before taxes 225 Add:

Depreciation 17

Directors’ remuneration 9 Salaries, wages & gratuities etc. 82

Cess and local taxes 43

Interest on debentures 2 Interest on fixed loan 18 171

Total value added 396

Working Note:

Calculation of Excise Duty

Say cost of bought in materials and services is ‘x’

Excise Duty is 10% of x = x/10

x = 461 + 24 + 9 + x/10

x = 494 + x/10 = 549 (approx.)*

Excise Duty = 549 – 494 = Rs. 55

* The above calculated excise duty is not exactly 10% of cost of bought in material amounting Rs. 549. The difference is due to approximation.

Question 3

The Capital Structure of M/s XYZ Ltd., on 31st March, 2003 was as follows:

Rs. Equity Capital 18,000 Shares of Rs. 100 each 18,00,000 12% Preference Capital 5,000 Shares of Rs. 100 each 5,00,000 12% Secured Debentures 5,00,000 Reserves 5,00,000 Profit earned before Interest and Taxes during the year 7,20,000 Tax Rate 40% Generally the return on equity shares of this type of Industry is 15%.

Subject to:

(a) The profit after tax covers Fixed Interest and Fixed Dividends at least 4 times.


(b) The Debt Equity ratio is at least 2;

(c) Yield on shares is calculated at 60% of distributed profits and 10% of undistributed profits;

The Company has been paying regularly an Equity dividend of 15%.

The risk premium for Dividends is generally assumed at 1%.

Find out the value of Equity shares of the Company. (16 marks)

Answer

Calculation of profit after tax (PAT) Rs. Profit before interest & tax (PBIT) 7,20,000

Less: Debenture interest (Rs. 5,00,000 × 12/100) 60,000

Profit before tax (PBT) 6,60,000

Less: Tax @ 40% 2,64,000 Profit after tax (PAT) 3,96,000

Less: Preference dividend

×

10012

5,00,000 Rs.

60,000

Equity dividend

×

10015

18,00,000 Rs.

2,70,000

3,30,000

Retained earnings (undistributed profit) 66,000

Calculation of Interest and Fixed Dividend Coverage

=dividend Preference interest Debenture

interest Debenture PAT+

+

60,000 60,000 Rs.60,000 3,96,000 Rs.

++=

times 3.8 1,20,000 Rs. 4,56,000 Rs. ==

Calculation of Debt Equity Ratio

funds) ers'(shareholdEquity loans) term (longDebt

RatioEquity Debt =

Reserves capital shareEquity capital share Preference

Debentures

++=


5,00,000 18,00,000 5,00,000 Rs.

5,00,000 Rs.++

=

Debt Equity Ratio = .179 28,00,000 Rs.5,00,000 Rs. =

The ratio is less than the prescribed ratio.

Calculation of Yield on Equity Shares

Yield on equity shares is calculated at 60% of distributed profits and 10% of undistributed profits:

60% of distributed profits (60% of Rs. 2,70,000) 1,62,000

10% of undistributed profits (10% of Rs. 66,000) 6,600

1,68,600

Yields on equity shares = 100 capital shareEquity

shares on Yield ×

= 100 18,00,000 Rs.1,68,600 Rs. ×

= 9.37%

Calculation of Expected Yield on Equity Shares Normal return expected

15%

Add: Risk premium for low interest and fixed dividend coverage (3.8 < 4) 1%* Risk for debt equity ratio not required Nil**

16%

Value of an Equity Share

= share a of value up Paid yield Expected

yield Actual ×

= 58.56 Rs. 100 16

9.37 =×

For * When interest and fixed dividend coverage is lower than the prescribed norm, the

riskiness of equity investors is high. They should claim additional risk premium over and above the normal rate of return. Hence, the additional risk premium of 1% has been added.

** The debt equity ratio is lower than the prescribed ratio, that means outside funds (Debts) are lower as compared to shareholders’ funds. Therefore, the risk is less for equity shareholders. Therefore, no risk premium is required to be added in this case.


Question 4

(a) X Co. Ltd. supplied the following information. You are required to compute the basic earning per share:

(Accounting year 1.1.2002 – 31.12.2002) Net Profit : Year 2002 : Rs. 20,00,000 : Year 2003 : Rs. 30,00,000 No. of shares outstanding prior to Right Issue : 10,00,000 shares Right Issue : One new share for each four

outstanding i.e., 2,50,000 shares. Right Issue price – Rs. 20 Last date of exercise rights –

31.3.2003.

Fair rate of one Equity share immediately prior to exercise of rights on 31.3.2003

: Rs. 25

(b) A Ltd. Leased a machinery to B Ltd. on the following terms:

(Rs. in Lakhs) Fair value of the machinery 20.00 Lease term 5 years Lease Rental per annum 5.00 Guaranteed Residual value 1.00 Expected Residual value 2.00 Internal Rate of Return 15%

Depreciation is provided on straight line method @ 10% per annum. Ascertain unearned financial income and necessary entries may be passed in the books of the Lessee in the First year.

(c) The following particulars are stated in the Balance Sheet of M/s Exe Ltd. as on 31.03.2003:

(Rs. in Lakhs) Deferred Tax Liability (Cr.) 20.00 Deferred Tax Assets (Dr.) 10.00

The following transactions were reported during the year 2003-04:

(i) Tax Rate 50% (ii) Depreciation – As per Books 50.00


Depreciation – for Tax purposes 30.00 There were no addition to Fixed Assets during the year. (iii) Items disallowed in 2002-03 and allowed for Tax purposes in 2003-04 10.00 (iv) Interest to Financial Institutions accounted in the Books on accrual

basis, but actual payment was made on 30.09.2004

20.00 (v) Donations to Private Trusts made in 2003-04 10.00 (vi) Share issue expenses allowed under 35(D) of the I.T. Act, 1961 for the

year 2003-04 (1/10th of Rs. 50.00 lakhs incurred in 1999-2000)

5.00 (vii) Repairs to Plant and Machinery Rs. 100.00 lakhs was spread over the period 2003-

04 and 2004-05 equally in the books. However, the entire expenditure was allowed for Income-tax purposes.

Indicate clearly the impact of above items in terms of Deferred Tax liability/Deferred Tax Assets and the balances of Deferred Tax Liability/Deferred Tax Asset as on 31.03.2004.

(8 + 8 + 4 = 20 marks)

Answer

(a) Computation of Basic Earnings Per Share

(as per paragraphs 10 and 26 of AS 20 on Earnings Per Share) Year

2002 Year 2003

Rs. Rs. EPS for the year 2002 as originally reported

= year the during goutstandin sharesequity of number average Weighted

rsshareholdeequity to leattributab year the ofprofit Net

= (Rs. 20,00,000 / 10,00,000 shares) 2.00 EPS for the year 2002 restated for rights issue

= [Rs. 20,00,000 / (10,00,000 shares × 1.04∗)] 1.92 (approx.)

EPS for the year 2003 including effects of rights issue

9/12) shares (12,50,000 3/12) 1.04 shares (10,00,000

30,00,000 Rs.×+××

shares 11,97,500

30,00,000 Rs.

2.51

(approx.)

∗ Refer working note 2.


Working Notes:

1. Computation of theoretical ex-rights fair value per share

exercise the in issued shares of Number exercise to prior goutstandin shares of Number

exercise from receivedamount Total rights of exercise to priory immediatel shares goutstandin all of value Fair+

+

( ) ( )shares 2,50,000 shares 10,00,000

shares 2,50,000 20 Rs. shares 10,00,000 25 .Rs+

×+×=

24 Rs. shares 2,50,0001

03,00,00,00 Rs. ==

2. Computation of adjustment factor

share per value rights-ex heoreticalTrights of exercise to prior share per value Fair=

(approx.) 1.04 1) Note Working (Refer 24 .Rs

25 Rs. ==

(b) Computation of Unearned Finance Income

As per AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in the lease and (b) the present value of minimum lease payments under a finance lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.

where :

(a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the lessor and (ii) any unguaranteed residual value accruing to the lessor.

Gross investment = Minimum lease payments + Unguaranteed residual value

= (Total lease rent + Guaranteed residual value) + Unguaranteed residual value

= [(Rs. 5,00,000 × 5 years) + Rs. 1,00,000] + Rs. 1,00,000

= Rs. 27,00,000

(b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value (URV).

Year MLP inclusive of URV Internal rate of return (Discount

factor 15%)

Present Value

Rs. Rs. 1 5,00,000 .8696 4,34,800 2 5,00,000 .7561 3,78,050


3 5,00,000 .6575 3,28,750 4 5,00,000 .5718 2,85,900 5 5,00,000 .4972 2,48,600 1,00,000 .4972 49,720 (guaranteed residual value) 17,25,820 (i) 1,00,000 .4972 49,720 (ii) (unguaranteed residual value) (i) + (ii) 17,75,540 (b)

Unearned Finance Income = (a) – (b)

= Rs. 27,00,000 – Rs. 17,75,540

= Rs. 9,24,460

Journal Entries in the books of B Ltd. Rs. Rs. At the inception of lease Machinery account Dr. 17,25,820∗

To A Ltd.’s account 17,25,820*

(Being lease of machinery recorded at present value of MLP)

At the end of the first year of lease Finance charges account (Refer Working Note) Dr. 2,58,873

To A Ltd.’s account 2,58,873

(Being the finance charges for first year due)

∗ As per para 11 of AS 19, the lessee should recognise the lease as an asset and a liability

at an amount equal to the fair value of the leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the present value of minimum lease payments from the standpoint of lessee, the amount recorded should be the present value of these minimum lease payments. Therefore, in this case, as the fair value of Rs. 20,00,000 is more than the present value amounting Rs. 17,25,820, the machinery has been recorded at Rs. 17,25,820 in the books of B Ltd. (the lessee) at the inception of the lease. According to para 13 of the standard, at the inception of the lease, the asset and liability for the future lease payments are recognised in the balance sheet at the same amounts.


A Ltd.’s account Dr. 5,00,000

To Bank account 5,00,000 (Being the lease rent paid to the lessor which

includes outstanding liability of Rs. 2,41,127 and finance charge of Rs. 2,58,873)

Depreciation account Dr. 1,72,582

To Machinery account 1,72,582 (Being the depreciation provided @ 10% p.a. on

straight line method)

Profit and loss account Dr. 4,31,455

To Depreciation account 1,72,582

To Finance charges account 2,58,873 (Being the depreciation and finance charges

transferred to profit and loss account)

Working Note:

Table showing apportionment of lease payments by B Ltd. between the finance charges and the reduction of outstanding liability.

Year Outstanding liability (opening

balance)

Lease rent Finance charge

Reduction in outstanding

liability

Outstanding liability

(closing balance)

Rs. Rs. Rs. Rs. Rs. 1 17,25,820 5,00,000 2,58,873 2,41,127 14,84,693

2 14,84,693 5,00,000 2,22,704 2,77,296 12,07,397 3 12,07,397 5,00,000 1,81,110 3,18,890 8,88,507

4 8,88,507 5,00,000 1,33,276 3,66,724 5,21,783

5 5,21,783 5,00,000 78,267 5,21,783 1,00,050* 8,74,230 17,25,820

* The difference between this figure and guaranteed residual value (Rs. 1,00,000) is

due to approximation in computing the interest rate implicit in the lease.


(c) Impact of various items in terms of deferred tax liability/deferred tax asset.

Transactions Analysis Nature of difference

Effect Amount

Difference in depreciation

Generally, written down value method of depreciation is adopted under IT Act which leads to higher depreciation in earlier years of useful life of the asset in comparison to later years.

Responding timing difference

Reversal of DTL

Rs. 20 lakhs × 50% = Rs. 10 lakhs

Disallowances, as per IT Act, of earlier years

Tax payable for the earlier year was higher on this account.


Reversal of DTA


Interest to financial institutions

It is allowed as deduction under section 43B of the IT Act, if the payment is made before the due date of filing the return of income (i.e. 31st October, 2004).

No timing difference

Not applicable

Not applicable

Donation to private trusts

Not an allowable expenditure under IT Act.

Permanent difference

Not applicable

Not applicable

Share issue expenses

Due to disallowance of full expenditure under IT Act, tax payable in the earlier years was higher.


Reversal of DTA

Rs. 5 lakhs × 50% = Rs. 2.5 lakhs

Repairs to plant and machinery

Due to allowance of full expenditure under IT Act, tax payable of the current year will be less.

Originating timing difference

Increase in DTL



Deferred Tax Liability Account Dr. Cr. Rs.

in lakhs Rs.

in lakhs 31.3.2004 To Profit and Loss

account (Depreciation)

10.00

1.4.2003 By

By

Balance b/d

Profit and Loss Account

20.00

25.00

To Balance c/d 35.00 (Repairs to plant) ____

45.00 45.00 1.4.2004 By Balance b/d 35.00

Deferred Tax Asset Account Dr. Cr. Rs.

in lakhs Rs.

in lakhs 1.4.2003 To Balance b/d 10.00 31.3.2004 By

Profit and Loss Account: Items disallowed in

2002-03 and allowed as per I.T. Act in

2003-04 5.00

Share issue expenses 2.50

____ By Balance c/d 2.50 10.00 10.00

1.4.2004 To Balance b/d 2.50

Question 5

(a) From the following details of Loan Fund of Kanpur Institute of Technology for the year 2003-2004, you are required to prepare a statement showing changes in the Loan Fund Balance :

Rs. Fund balance as on 1.4.2003 25,00,000 Grants from the Government and Society 12,00,000 Grants from Revenue Fund 50,000 Other transfer from Unrestricted Fund 70,000 Investment income 60,000


Interest on Loan 40,000 Refund to Granters 25,000 Bad Debts written off 15,000 Administration and collection costs 25,000

(b) Mr. Investor buys a stock option of ABC Co. Ltd. in July, 2003 with a strike price on

30.07.2003 of Rs. 250 to be expired on 30.08.2004. The premium is Rs. 20 per unit and the market lot is 100. The margin to be paid is Rs. 120 per unit.

Show the accounting treatment in the books of Buyer when:

(i) the option is settled by delivery of the asset, and

(ii) the option is settled in cash and the index price is Rs. 260 per unit. (4 + 12 = 16 marks)

Answer

(a) Kanpur Institute of Technology Statement of changes – Loan funds

Rs. Balance as on 1st April, 2003 25,00,000 Additions during the year 2003-2004: Grants from government and society 12,00,000 Investment income 60,000 Interest on loan 40,000 Grants from revenue fund 50,000 Other transfer from unrestricted funds 70,000 14,20,000 Deductions during the year 2003-04: Refund to granters 25,000 Bad debts written off 15,000 Administration and collection costs 25,000 (65,000) Balance as on 31st March, 2004 38,55,000

(b) Accounting entries in the books of buyer

2003 At the time of inception Rs. Rs. July Stock option premium account Dr. 2,000 To Bank account 2,000

(Being premium paid to buy a stock option)


Deposit for margin money account Dr. 12,000

To Bank account 12,000 (Being margin money paid on stock option)

At the time of settlement

(i) Option is settled by delivery of the asset

August Shares of ABC Ltd. account Dr. 25,000 To Deposit for margin money account 12,000

To Bank account 13,000

(Being option exercised and shares acquired, Rs. 12,000 margin money adjusted and the balance amount was paid)

Profit and loss account Dr. 2,000

To Stock option premium account 2,000 (Being the premium transferred to profit and

loss account on exercise of option)

(ii) Option is settled in cash

Profit and loss account Dr. 2,000

To Stock option premium account 2,000

(Being the premium transferred to profit and loss account)

Bank account (Rs. 100 × 10) Dr. 1,000

To Profit and loss account 1,000

(Being profit on exercise of option)

Bank account Dr. 12,000 To Deposit for margin money account 12,000

(Being margin on equity stock option received back on exercise of option)

Question 6

Write short notes on the following:

(a) “Non-Performing Assets” as per NBFC Prudential Norms (RBI) directions.

(b) Some key differences between IAS, US GAAP and Indian AS with respect to

(i) Fixed Assets

(ii) Changes in Accounting Policy and Prior period items.


(c) Environmental Accounting.

(d) Advantages and disadvantages of setting of Accounting Standards. (4 × 4 = 16 marks)

Answer

(a) “Non−−Performing Asset” as per NBFC Prudential Norms (RBI) directions means:

(i) An asset, in respect of which, interest has remained past due for six months; (ii) A term loan inclusive of unpaid interest, when the instalment is overdue for more

than six months of which interest amount remained past due for six months; (iii) A bill which remained overdue for six months; (iv) The interest in respect of a debt or the income on receivables under the head ‘other

current assets’ in the nature of short term loans/advances that remained overdue for a period of six months;

(v) Any dues on account of sales of assets or services rendered or reimbursement expenses made, which remained overdue for a period of six months;

(vi) The lease rental and hire purchase instalment, which has become overdue for a period of more than twelve months;

(vii) In respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities made available to borrower /beneficiary when anyone of the credit facilities becomes NPA.

However, an NBFC may classify each such account on the basis of record of recovery as regards hire purchase and lease transactions.

(b)

IAS US GAAPs Indian AS

(i) Fixed

Assets

Fixed assets are carried at historical cost. Revaluation of fixed assets is allowed but the capitalisation of exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets is not permitted.

Fixed assets are carried at historical cost. Only downward revaluation is permit-ed for impairment. Exchange fluctua tions on loans taken for purchase of fixed assets are expensed when incurred.

Fixed assets are usually carried at historical cost, revaluations of Fixed Assets are permitted in AS 10. AS 28 permits impairment of assets if specified conditions are satisfied. AS 11 (Revised 2003) requires that exchange differences arising on repayment of liabilities incurred for acquiring fixed assets should be recognized in the statement of profit and loss.


(ii) Changes in Accounting Policy and Prior period items.

Prior period items are accounted by restating to prior years and making adjustments to retained profits. The effect of change in accounting policies is disclosed separately in the profit and loss statement.

Prior period items are accounted by restating to prior years and adjust-ments to retained profits. Changes in accounting policies are not accounted by restating prior years but the effect of such changes is separately disclosed in the Profit and Loss statement in the same manner as in IAS.

As per AS 5, changes in accounting policies and prior period items are reported on prospective basis, if material, beginning with the year of change. Unlike in US GAAPs and IAS, AS 5 requires the restatement of comparatives to account for accounting errors, the adjustment is required to be made in the current year with disclosures of the prior period amounts.

(c) The term ‘environment’ includes everything in all its manifest forms, on the earth,

beneath the earth and above the earth. A business enterprise takes support of social and ecological system in order to maximize wealth. Economic activity, social welfare and a diverse environment, all are linked and ultimately depend on each other. The functioning of an enterprise may have some favourable and some adverse effects on the environment. Hence, it is felt that there is a need for maintaining accounts of the effects of activities of business entity on the environment. Environmental accounting can be defined as a system (methodology) for measuring environmental performance and communicating the results of these measurements to users. It helps in presenting the utilization of natural resources by an enterprise, the costs incurred to use them and the income earned therefrom in a transparent manner. Environmental accounting, entirely a new concept, is a faithful attempt to identify the resources exhausted and the costs rendered reciprocally to the enterprise by a business corporation. Thus environmental accounting stands for recording and documenting environmental performance to facilitate effectiveness of environmental management system with reference to compliance, safety and quality control. It provides a data base for taking corrective steps and future action for developing organisation’s environmental strategy and for identifying environmentally based opportunities for gaining an edge over one’s competitors. If proper environmental accounting system is established, the enterprise will be able to anticipate environmental damage and therefore can prevent it from happening.

Of course environmental accounting is still in an early stage of evolution and it is being groomed under the voluntary leadership of a variety of enterprises around the world. Recognising the importance of protecting and preserving the environment, a number of laws have been enacted throughout the world.

(d) The Accounting Standards seek to describe the accounting principles, the valuation


techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in companies’ economic performance. The setting of accounting standards has the following advantages:

(i) Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements.

(ii) There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.

(iii) The application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country. However, it should be noted in this respect that differences in the institutions, traditions and legal systems from one country to another give rise to differences in accounting standards practised in different countries.

However, there are some disadvantages of setting of accounting standards:

(i) Alternative solutions to certain accounting problems may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become difficult.

(ii) There may be a trend towards rigidity and away from flexibility in applying the accounting standards.

(iii) Accounting standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes.

Advance Accounting 2004 Suggested

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